2 Answers
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In the United States, alcohol rationing was stopped in 1862 by an act of Congress which also prohibited "distilled liquors" from being aboard a vessel, with an exception made for medical supplies. Then Secretary of the Navy Gideon Welles issued a general order requiring captains to comply.

Two years later, Welles issued another general order requiring that all beer and wine and other non-distilled liquors be treated as the private stores of seamen, and required them to be stowed securely in private areas (Lockers, etc). He further specified that each sailor needed permission from their captain in order to bring it aboard.

In 1893 Article 1080 of the Navy Regulations permitted wardroom and steerage officers to form their own wine messes, that is a mess area for wine. No officers were required to be members of the wine mess.

Finally in 1914, Josephus Daniels, who was the Secretary of the Navy then, issued a general order prohibiting all consumption of alcoholic beverages on-board all Navy vessels.

One reason this practice was discontinued was there was no longer a need for the alcohol. Originally it was used to sweeten stale water that had grown algae in it after a long voyage, and modern storage methods precluded the need for this. Another reason it was discontinued in the US was changing attitudes about alcohol.

In the UK, the beverage issued was called grog, named either for how you'd feel when you drank it (groggy), or maybe more likely, named after the Admiral who instituted the practice of using Rum, "Old Groggy". The practice continued until 1970 among British sailors.

I'm not sure alcohol was ever to make up for the conditions - it was more that it was a storable and safe alternative to water
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noneApr 29 '12 at 14:58

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@mgb I have only anecdotal information that it was to help keep discipline: I remember reading that somewhere. The source will come back to me eventually and I can go look at it then, and give a citation if it's an authoritative source. Eidetic memory accompanied by delayed recall of details is irritating sometimes.
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Nathan C. TreschApr 29 '12 at 15:19

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I only heard this anecdotally, but the British Grog ration was more to keep them in line and slightly drunk so they were easier to control. Though I never understood how slightly drunk, impressed low class men were easy to control that way.
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MichaelFApr 29 '12 at 15:27

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The Wikipedia entry on Grog appears to be pretty credible (I haven't fully checked out the sources though). The article concurs with mgb's assessment that the main reason for instituting the drink ration was to better keep stagnant water fresh and algae free. The interesting thing about the article is the suggestion that temperance movements had some roll in curbing and eventually ending the practice. Also apparently the US merchant marine avoided drink rations entirely. It is possible that by the late nineteenth century methods of storing water improved thus relying less on alcohol.
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BrotherJackApr 30 '12 at 7:10

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In the RN the Queen, or the Admiralty (and possibly a few others) can still order "Splice the Mainbrace" whereby a tot of Rum is given to every sailor on board.
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KobuniteJun 6 '13 at 11:16

There is the quote “Don’t talk to me about naval tradition. It’s nothing but rum, sodomy and the lash.”, often mis-attributed to Winston Churchill when he was Lord of the Admiralty but it goes back further than that.